Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—S.D.N.Y.: Shareholder action following fund’s downfall alleging misstatements may proceed in part, (Aug 18, 2026)

By Rebecca E. Hoffman, J.D.

The court found that control person liability was not plausibly alleged against portfolio manager and investment adviser defendants, and that some of the allegations were insufficient.

Defendants’ motion to dismiss, in a putative shareholder class action alleging that an open-end mutual fund’s registration and proxy statements contained false and misleading statements that brought about investor losses, is granted in part and denied in part, and four defendants for which the plaintiffs could not demonstrate control person liability are also dismissed (In re Easterly ROCMuni High Income Municipal Bond Fund, No. 1:25-cv-06028 (S.D.N.Y. Aug. 17, 2026)).

From July 29, 2022, through June 12, 2025, shares of Easterly ROCMuni High Income Municipal Bond Fund (which had been a series of the Managed Portfolio Series Trust but was reorganized in October 2024 into a series of the James Alpha Funds Trust) were offered through a series of registration statements and prospectuses, and it is alleged that the documents were materially false or misleading.

The court explained that an open-end mutual fund calculates a daily net asset value (NAV) for its shares. The fund must have assets with enough liquidity to satisfy requests to redeem shares, and thus there are rules governing the percentage of illiquid assets that the fund can hold.

Documents at issue stated that the fund will not hold more than 15 percent of the value of its net assets in illiquid investments, as required by SEC rules, but the complaint noted municipal bonds that were arguably illiquid and represented more than 15 percent of the fund’s NAV at several points. The complaint “alleges that these bonds, combined with the Fund’s other highly illiquid assets, accounted for at least 45% of the Fund’s net assets two weeks before its collapse,” the court said.

The fund also stated that assets were valued “at their market price” or “at fair value,” but did not disclose problems with the fund’s valuation process, the complaint alleged. Other statements about defaulted securities and how much of the fund’s portfolio was invested in the same or related businesses left out key details, according to the complaint.

Decline leads to dissolution. The court explained the fund’s NAV declined more than 30 percent on June 13, 2025, and 52 percent by July 22. The complaint alleged violations of Securities Act Sections 11, 12(a)(2), and 15, and Exchange Act Sections 14(a) and 20(a) against the fund itself as well as registrants, investment advisers, portfolio managers, officers, trustees, and underwriters.

Denied, granted in part. The court found that the claim regarding the fund’s statement about illiquid investments can proceed. Infrequent trading and a lack of secondary markets, among other factors, were sufficient to show that securities were illiquid. The complaint’s “detailed allegations support the inference that the securities could not have been sold within seven days without ‘significantly changing’ their market value and are sufficient to state a claim.”

However, the court dismissed as to statements about valuation, because the complaint does not allege a false statement. Statements the complaint pointed to do not falsely represent that valuations would be accurate; instead, they note that valuations from different pricing services may diverge.

The court also dismissed as to statements about purchasing securities that were in default, noting that this was not expected to be a significant investment strategy. The complaint did not allege that defaulted securities the fund held were in default when acquired, the court observed. However, the motion was denied to the extent the fund allegedly omitted the default status of certain portfolio securities.

Last, the court found that statements regarding holding securities in related companies, in which the fund warned that such securities in a sufficiently large proportion of the portfolio could have a negative effect, were not untrue assertions of fact, even if the fund had made investments that it was warning against, since the complaint did not allege losses from those investments.

The complaint also alleged a violation of Exchange Act Section 14(a), which prohibits the solicitation of proxies with false or misleading information. The court found that the complaint failed to allege how the alleged misstatements might have “affected a reasonable shareholder’s evaluation of the proposed reorganization, on which they were being called to vote,” even where the same statements support the plaintiffs’ Securities Act claims.

The court dismissed all claims against defendants which, the court found, did not have sufficient authority to be subject to control person liability.

The case is No. 1:25-cv-06028.

Judge: Cote, D.

Attorneys: Jeffrey Philip Campisi (Kaplan Fox & Kilsheimer LLP) for Richard Fulford. Gregory Bradley Linkh (Glancy Prongay Wolke & Rotter LLP) for William Considine, Jennifer Mauran, Wayne Considine and Maureen Considine. Robert Joseph Giuffra, Jr. (Sullivan & Cromwell, LLP) for James Alpha Funds Trust d/b/a Easterly Funds Trust. Joshua Alan Dunn (Vedder Price P.C.) for Managed Portfolio Series Trust and Easterly Investment Partners LLC. Alexander Breckinridge (Jones Walker LLP) for Principal Street Partners, LLC n/k/a Calydon Capital, LLC, and Easterly Securities LLC. Cameron S. Matheson (Davis Wright Tremaine LLP) for Quasar Distributors, LLC, Troy E. Willis, Charlie S. Pulire and Darrell Crate.

Companies: James Alpha Funds Trust d/b/a Easterly Funds Trust; Managed Portfolio Series Trust; Easterly Investment Partners LLC; Principal Street Partners, LLC n/k/a Calydon Capital, LLC; Easterly Securities LLC; Quasar Distributors, LLC

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